A just-published report updated our investment strategy for 2025, which we anticipate will be more volatile and with lower investment returns. Critical to the outlook will be whether DM inflation eases closer to the 2% target of most central banks, or proves sticky (with an upward tilt in the case of the U.S.), as we expect.
There have been many unprecedented developments this decade in terms of economic and inflation trends, policy actions and market performance. One of the most unusual outcomes has been the persistent inversion of the U.S. yield curve since 2022. Typically, inversions herald a recession, but the U.S. economy has instead continued to grow at an above-potential pace.
Moreover, the yield curve has just now returned to its traditional shape – upward sloping – albeit via rising bond yields, a so-called bear steepening. This is most peculiar at a time when the Fed is cutting its policy rate. But then, it is also unusual for the Fed to be cutting rates while also lifting its estimate of the long-term neutral rate and against a backdrop of rising corporate profits.
Net: is the Fed losing control of the long end of the yield curve, i.e. are bond zealots giving way to bond vigilantes? If yes, then buckle up for a wild ride in 2025!